ARLP is this Week’s Featured Stock
Since December 2020, coal prices have soared from $50/ton to over $200/ton. Some of the major factors for strength in coal prices are the rising price of natural gas, years of underinvestment in CAPEX, and utilities in the US switching away from coal due to environmental regulations.
During the pandemic, coal production dropped even more, while demand has turned out to be more robust than expected. Natural gas production and transportation have also been disturbed by the same supply chain issues that are affecting so many industries across the world. As a result, many countries are having to increase coal consumption to meet the shortfall.
Given these favorable developments, investors should consider buying Alliance Resource Partners (ARLP), a high-quality coal stock with considerable upside potential in the near future.
Company Background
ARLP is the second-largest coal producer in the Eastern United States. It generates income from coal production and oil & gas interests from its locations across the US. Currently, it has 7 underground mining complexes in Illinois, Indiana, Kentucky, Maryland, Pennsylvania, and West Virginia as well as a coal-loading terminal in Indiana on the Ohio River. Its customers are domestic and international utilities and industrial companies.
In mid-2014, ARLP peaked at around $50. Since then, it was mired in a brutal bear market that saw the stock bottom around $3.35 in November 2020. ARLP started rising as the economy returned to normal with energy supplies failing to meet growth in energy demand which has resulted in all sorts of energy prices hitting multi-year highs.
Growth
This improvement in circumstances has translated into spectacular financial performance for ARLP. This is evident from its 122% EPS growth in its last quarter, topping analysts’ estimates. In addition, revenue was 13.9% higher on a sequential basis, and demand should only increase in colder months.
The company also raised guidance which isn’t surprising considering it’s enjoying higher sales volume and higher prices. It also recorded a strong quarter in terms of dealing with its order backlog and it secured future contracts to deliver coal in 2022 and beyond.
Value
Despite this stellar earnings growth, ARLP has a very reasonable valuation with a forward P/E of 12.4 which is significantly cheaper than the S&P 500’s forward P/E of 22. Another attractive aspect of ARLP is that it’s a free cash flow generating machine - $80 million in the last quarter and expectations of $100 million in its upcoming quarter. This means that ARLP will generate its entire net worth in cash in about 3.5 years' time.
The main reason for this discrepancy is that investors are still unconvinced that coal prices will remain elevated. However, ARLP’s management seems confident that higher coal prices are here to stay. At its last conference call, they said “Coal demand is expected to be stable through 2022. International coal markets are also extremely positive. Driven by increased power demand as economies reopen around the world, elevated natural gas prices and a lack of global supply response, coal demand and prices have spiked."
One of the biggest risks of a value stock is that its earnings and revenue are moving in the wrong direction. Clearly, this is not an issue with ARLP given the positive macro environment and management’s confidence.
POWR Ratings
The POWR Ratings are quite bullish on ARLP as it’s rated an A which translates to a Strong Buy. A-rated stocks have posted an average annual performance of 30.7% which compares favorably to the S&P 500’s annual 7.1% gain.
The POWR Ratings are calculated by weighing 118 different factors - each with its own unique weight. It also evaluates stocks by various components to give additional insight to investors. Given ARLP’s strong gains and strength in the energy sector, it’s not surprising that it has an A for Momentum. To see more of ARLP’s POWR Ratings, click here.
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ARLP shares were trading at $12.20 per share on Monday morning, up $0.44 (+3.74%). Year-to-date, ARLP has gained 180.65%, versus a 18.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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